Rite Aid stock (NYSE:RAD) really has no chance of turning around anytime soon. After all, RAD stock is down from a peak price of $173 in early 2017 to just $6.90. But Rite Aid stock has no real prospects right now of turning around.
This pharmacy/retail company has huge financial issues. Management has no clear to fix the problems. As a result, RAD stock has no catalyst to make it rise.
Rite Aid’s Financial Issues
The latest quarterly report showed Rite Aid has $3.84 billion in debt and $2.75 billion in operating leases. Interest expense alone costs $60 million a quarter and net income losses are $79 million.
Even worse, Rite Aid loses $1.29 billion in annual free cash flow (on a run-rate basis). Rite Aid has only $142 million in cash. So each quarter it is borrowing $250 million and increasing the debt load. That tells you everything you need to know about RAD stock’s prospects.
Moreover, there is little good to discuss about Rite Aid. Its recent year-over-year performance was completely negative. Maybe this is good news – you can now pick up Amazon boxes at Rite Aid stores. Rite Aid has no costs with this Amazon pick-up program. They make a small, undisclosed commission.
Rite Aid Stock and the Possible Turnaround
Turnaround stocks rarely turn around. This applies to Rite Aid. Its debt burden is suffocating. The debt is not due until the end of 2023 and management is taking its time. In the latest conference call management presented no clear plan to pay down the debt.
Management thinks its cost-cutting will lead to higher revenue and profits. But Rite Aid’s costs are still rising. There are things management could do right away.
For example, Rite Aid’s annual 10-K report shows that it has $670 million in land and buildings, plus $1.57 billion in leasehold improvements before depreciation. It’s possible this real property could be worth twice the depreciated amount.
So management could come up with a plan to sell/lease-back the real assets. Then the proceeds would lower debt and interest expenses. As a result, debt and interest expenses would fall by almost half.
This simple plan would show a proactive management plan. RAD stock would move up on the rumor, not just the news. People would assume other plans to cut debt quickly are in store.
Valuation Issues with Rite Aid Stock
Rite Aid’s enterprise value (net debt plus market value) is $3.56 billion. Adjusted EBITDA in the latest quarter was $134 million, or $526 million annually. So Rite Aid stock’s EV ratio is 6.8 times EBITDA, and that is just too high.
Think about that for a second. It will take almost seven years to pay off all the debt, and that does not include operating leases. But Rite Aid’s debt is due in three years. This ratio alone tells you that management needs to do something more.
The free cash flow losses are forcing the company to increase its debt each quarter. Maybe the company should think outside the box. Does it even need retail stores?
Thinking Outside the Rite Aid Box
What if Rite Aid became like Express Scripts – which Cigna (NYSE:CI) bought out last year – filling prescriptions by mail (PBM)? After all, Rite Aid even has a PBM division right now it could build on.
Maybe that should be the sole focus of Rite Aid going forward. A bold plan like this could eliminate cash flow losses. For example, if they sold the physical stores, Rite Aid stock would likely move up.
Or maybe Rite Aid could hook up with a health insurer, just like CVS did (NYSE:CVS) with Aetna. Alternatively, they could find a large international partner like a UK pharmacy group. And that is what Walgreens did (NYSE:WBA) with Boots Alliance.
The truth is, Rite Aid might actually be thinking of doing some form of merger and acquisition. This activity could alleviate their debt issues in one fell swoop. That might be why it looks like management has no clear plan.
Bottom Line on RAD Stock Price
Don’t expect that management will come up with a bold plan. If they do, you might miss just the first upward tick. An investment in Rite Aid stock at that point would have a chance of making money. If they decide to sell the Rite Aid, you would be better off to wait and see the potential partner first.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.
